Energy-Efficient Mortgages Explained: Pros, Cons, And What to Know

Written by Elijah BishopUpdated: 6th Mar 2022
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Many homes spend thousands of dollars per year on energy bills and make large monthly utility payments. Energy-efficient mortgages (EEMs) and the energy-efficient mortgage program provide a method for us to help save the earth, be more environmentally responsible, and save money. EEMs, which are available for both new and existing homes, offer a convenient option for current and prospective homeowners to finance the cost of energy-efficient modifications.

In this article, we’ll go over Energy Efficient Mortgages, how it works, EEM mortgage types, and the pros and cons of getting an EEM mortgage. 

What Is an Energy-Efficient Mortgage? 

An energy-efficient mortgage (EEM) is a loan used to purchase or refinance a home that satisfies particular energy-efficiency standards or improves it to make it more energy-efficient. The residence serves as security for the loan, as it does with other mortgages. An EEM might be a standard EEM insured by the Federal Housing Administration (FHA) or guaranteed by the United States Department of Veterans Affairs (VA).

How Do Energy-Efficient Mortgages Work? 

You can utilize an EEM in conjunction with another mortgage, such as a conventional loan or a renovation loan, depending on the type of EEM. You can borrow up to 15% of the appraised value of your house to undertake energy-efficiency upgrades.

When determining whether a borrower is eligible for an EEM, a mortgage lender evaluates how much money the borrower stands to save on utilities by purchasing or refinancing an energy-efficient property or performing energy-efficiency modifications. These expected savings are obtained through an energy assessment, and they can help you qualify for a larger loan by freeing up more money in your budget for a mortgage payment.

You might be able to save money by doing some of the renovation work yourself if your lender allows it, but you can’t pay yourself – you can only use the EEM funds to pay contractors or for materials. After the loan closes, you’ll have a specific length of time to engage contractors and finish the upgrades, which is normally three to six months.

Once the upgrades are completed, your mortgage lenderwill have your home inspectedto ensure that the improvements were done and genuinely boost the property’s energy efficiency. If everything checks up, the lender will provide you with the cash.

Energy-Efficient Mortgage (EEM) Eligibility Requirements 

While EEMs may have additional credit and documentation requirements, the most important is to get an energy assessment, which involves an energy consultant inspecting the home and preparing a Department of Energy (DOE) Home Energy Score Report, a Home Energy Rating System (HERS) report, or another comparable report. This paper details future changes, their costs, and the amount of money they will save.

The energy assessment isn’t cheap — it costs around $400 on average, according to HomeAdvisor — but you might be able to roll it into your loan. The DOE or HERS websites can help you find a local specialist to conduct the assessment. Once your financing closes, you’ll normally have three to six months to complete the improvements.

Energy-Efficient Mortgage Options and Types  

Homebuyers can choose from various energy-efficient mortgage financing plans, each of which comes with its own set of benefits and features.

FHA Energy Efficient Mortgage

A mortgage program for energy efficiency is also available through the Federal Housing Administration (FHA). The FHA doesn’t appear to have any explicit expenditure limits for energy upgrades — as long as they’re cost-effective.

Typically, an FHA–approved lender can use FHA’s EEM Calculator to establish the maximum monetary amount that a borrower can finance for energy upgrades. Solicit those figures from your lender as soon as possible.

The FHA EEM loan has the same minimum requirements as other FHA mortgages:

  • The amount required as a down paymentis 3.5 percentage point
  • A credit score of 580 or better is required (sometimes 500 with a 10 percent down payment)
  • A debt-to-income ratio of 50% or less is ideal.
  • A consistent and reliable source of income
  • The home must be your primary residence 

Individual lenders, on the other hand, can impose higher eligibility conditions. So, shop around with several lenders to discover ones who are sensitive to your situation. You can apply for one of these as long as you’re a legal resident of the United States.

>> More: Best FHA Mortgage Lenders

VA Loan Energy-Efficient Mortgages

Only veterans, active–duty service members, or members of closely affiliated organizations are eligible for the VA EEM program, which the US Department of Veterans Affairs backs. Widows or widowers of someone eligible are included in this category.

Compared to other EEM loans, the VA energy-efficient mortgage program has several unique rules.

  • According to Veterans United, if you’re spending less than $3,000 on a little improvement, you won’t need a home energy assessment (HEA). You need an estimate from a trustworthy contractor and the manufacturer’s specs for the products you wish to employ.
  • If you wish to invest more – up to $6,000 – a home energy evaluation is required.
  • With a VA loan, you may be able to finance energy-efficient upgrades worth more than $6,000 (albeit not for second-tier entitlements). Lenders, on the other hand, are likely to pose more obstacles.

Before considering any other sort of loan, qualified borrowers should explore the VA EEM loan. Below are some of the requirements of a VA EEM: 

  • The amount required as a down payment is zero percent
  • There is no minimum credit score requirement (but most lenders do, usually in the 580–640 range).
  • A debt-to-income ratio of 41% or below is ideal.
  • a consistent and reliable source of income
  • The abode must be your primary residence.

VA loans often offer the lowestmortgage rates available is perhaps the most significant advantage. You’ll never have to pay mortgage insurance again once you’ve paid your VA funding fee.

>> More: Best VA Mortgage Lenders

Conventional EEMs

The government does not back conventional loans. This includes “conforming loans,” which are mortgages that fulfill Fannie Mae andFreddie Mac’sguidelines. Each lender is free to create its own traditional EEM mortgage program. Fannie Mae’s HomeStyle Energy Mortgage or Freddie Mac’s GreenCHOICE Mortgage are anticipated to be offered by most lenders.

With these goods, you can spend up to 15% of the property’s “as-completed” value (what the assessor estimates the home will be worth after the work is completed) on energy-efficient upgrades. For example, if the appraiser estimates that the home will be worth $350,000 after energy efficiency modifications, you may be authorized to spend up to $52,500 on those changes.

EEM Criteria for Conforming Loans

Borrower Requirements for Fannie Mae (HomeStyle Energy) and Freddie Mac (GreenCHOICE) are essentially identical:

  • The amount required as a down payment is three percent
  • A credit score of 620 or above is required.
  • A debt–to–income ratio (DTI) of less than 45 percent
  • a consistent and reliable source of income

You can apply for the HomeStyle Energy or GreenCHOICE mortgage programs as long as you are a legal resident of the United States. These loans are intended to assist home purchasers and owners in improving the energy efficiency of their existing property while also saving money on electricity expenditures. They’re available while you’re buying a house (a home purchase mortgage) or upgrading your current one (a refinance mortgage).

What Do Green Mortgages Finance? 

There are numerous examples of energy-saving improvements homeowners can fund with an EEM. To be sure, not all remodeling trends are eligible for all financing kinds (for example, for a VA loan EEM, adding thermal-proofed windows is allowed under current guidelines, but giving your air-conditioning system an overhaul presently does not). However, the following are some examples of home improvements and expenses that you can fund with an energy-efficient mortgage loan:

  • Energy-saving appliances (refrigerators, washers, dryers, etc.)
  • Windows and panes that save energy
  • Heat pumps and furnaces
  • Various heating and cooling methods are available (solar, etc.)
  • Treatments for weatherization
  • Installations of water heaters and heaters
  • Weatherstripping and caulking
  • Repairs and installs of duct systems
  • Insulation for the home (walls, floors, attic, etc.)
  • Selective roofing enhancements

How Do Energy-Efficient Mortgages Benefit Buyers? 

Making a home more energy-efficient can be costly, and many families do not have funds for major home improvements. That’s where an energy-efficient mortgage comes in: it gives homeowners and buyers the financing they need to make green home upgrades. 

An extra benefit is that once you’ve upgraded to these features, you’ll save money on your energy bills, including those for electricity, water, and gas. More importantly, you will be able to reduce you and your family’s carbon footprints. 

>> More: Best Home Improvement Loans

Pros and Cons of Energy-Efficient Mortgages 


  • Make a green choice. If you care about the environment, an EEM could be an excellent investment instrument for you. Green mortgages can be beneficial even for homeowners who don’t already spend a lot on things like energy but want a more ecologically friendly home or a property that’s better positioned to deal with things like climate change.
  • Increase the size of your loan. An EEM could offer you a greater loan than you would otherwise receive.
  • Obtain a low-down payment option. HomeStyle Energy Mortgages and GreenCHOICE Mortgages may be paired with Fannie Mae’s HomeReady or Freddie Mac’s Home Possible programs. These programs, available to low-income purchasers, demand as little as 3% down.


  • It may take additional time. The additional clearances required for energy-efficient upgrades may cause your mortgage procedure to be delayed. They may be difficult to use for purchases in a fast-paced market unless the property has been on the market for a while and has no other interested parties or bids.
  • Not everything is covered. Depending on the type of EEM, you may discover that the upgrades you desire are not covered.
  • Long-term borrowing rates are rising. If you take out a larger loan and have to make greater monthly payments, you may wind up spending more money throughout the life of the loan. However, ideally, your lower monthly electricity bills will compensate for the increased mortgage costs.

Energy-Efficient Mortgages (EEMs) vs. Energy-Efficient Homes (EEHs) 

Energy-efficient mortgages and energy-efficient homes help borrowers save money on their utility bills, but in different ways. The energy-efficient housing program increases a borrower’s qualifying ratio by 2% above the conventional limit, while an EEM can result in a larger overall loan amount.

How Do I Qualify for a Green Mortgage? 

Qualifying for a green mortgage is similar to qualifying for a traditional mortgage. The lender will still scrutinize your credit history and income. The main distinction is that the additional cost of energy upgrades will not be factored into the qualifying procedure.

If you’re buying an existing home and want to green it up with an EEM, you’ll need to have it evaluated to acquire a HERS rating. You’ll also need to meet the normal requirements for a simple mortgage.

Understanding Home Energy Rating System (HERS) Score

A RESNET-certified Home Energy Rater evaluates a home’s energy efficiency and assigns a relative performance score (the HERS Index Score). The lower the value, the more energy-efficient the home. The US Department of Energy concluded that a typical resale property receives a HERS Index rating of 130. Still, a home built following the 2006 International Energy Conservation Code receives a rating of 100.

  • A HERS Index Score of 70 indicates that the home is 30% more energy efficient than the RESNET Reference Home.
  • A HERS Index Score of 130 indicates that the home is 30% less energy efficient than the RESNET Reference Home.

A qualified RESNET HERS Rater conducts an energy rating on your home and compares the data to a ‘reference home’– a designed-model home of the same size and form as the actual home– so your score is always proportional to the size, shape, and kind of house you live in.

When Is an Energy-Efficient Mortgage a Good Choice? 

EEMs are often best suited for homeowners seeking long-term value. Similarly, they’re a popular choice among buyers looking to invest in solar panels and other low-cost technology. Individuals who want to save money on utility bills may apply for energy-efficient mortgage loans.

Bottom Line: Energy-Efficient Mortgages 

Hopefully, this article has helped you comprehend Energy Efficient Mortgages. However, like with any financial instrument, the actual loans have intricacies and subtleties that are not detailed here. While this article provides an overview of EEMs, you should speak with an Energy Efficiency Mortgage Lender for more in-depth knowledge. 

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Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.